Avoiding hype helps price
Merino farmers are receiving strong prices as commodities go into severe decline because the industry did not fall into the trap of believing the previous boom cycle would last forever, says the New Zealand Merino Company (NZM).
Prices remain at historically high levels chiefly through $120 million of forward contracts in fibre and meat for the new 2012-13 season. The contracts are running at more than 25 per cent above commodity markets.
NZM says the prices are sustainable for farmers and the industry body's customers and have been achieved by avoiding the hype that markets are "resetting" every time there is a spike.
Chief executive John Brakenridge said the contracts differed from commodity pricing because they were supported by innovative marketing, allowing price points to be maintained and shared with merino suppliers.
He said high volatility was doing more to destroy markets than anything else.
"Some of the most expensive words in the English language are 'it will be different this time' and if we look at the history of commodities we hear that the world population is growing and the US is in a boom and now China is in a boom and there is a fundamental reset, but it's not and I think we have to be more careful."
He said other countries were equipped to grow protein quickly and for New Zealand to get good prices to its farmers there needed to be more branding, market insights and sophistication.
The more overseas customers told the story of New Zealand produce the more sought after and valuable the products would become, he said.
Fine wool prices in some micron brackets rose 70-90 per cent at auction 18 months ago only to fall through the "usual boom-bust cycle'. Coarse wool has followed the same course and sheepmeat prices have declined.
Brakenridge said these declines were a result of prices rising "too high and too fast" without marketing support.
"It really did spike, but the spike was short and has fallen away substantially. The market didn't sustain this and it opens the door for substitute products."
He said restaurant owners and other buyers have looked at cheaper alternatives to lamb and it would take a long time to have them returned to menus and store shelves.
Contracts for merino wool were at high levels, but had risen over a long time and were supported by farmers working closely with customers and backed by strong marketing to reach sustainable levels.
Brakenridge said NZM would not become complacent about 70 per cent of its business being in forward contracts. As markets came under pressure the company would assist brand partners and seek to fill the gaps in certain micron bands for niche markets, he said.
Merino suppliers could farm with confidence for this year and next as companies such as Icebreaker focused on longer term sustainability rather than chasing short- term commodity swings.
- © Fairfax NZ News
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